Due Diligence in the Mining Industry: Due Diligence and Risk Management

Due Diligence (DD), in a capital-intensive, high-risk, and environmentally significant industry like mining, has evolved from a simple procedure into a vital prerequisite for determining the success or failure of an investment. This process involves a thorough examination of all aspects of a target company or mining project by a potential investor, buyer, or financier. The goal is to uncover the hidden risks, legal liabilities, and true value behind the opportunities on the table. Given the unique dynamics of mining projects, unlike a standard corporate DD, this process necessitates a multidisciplinary and specialized analysis that integrates Geology and Reserves, Licensing and Legal, Environmental, Social, and Governance (ESG), and Financial Aspects. An investment decision made without this comprehensive review can lead not only to financial losses but also to operational downtime, protracted legal battles, and irreversible environmental damage.

The most critical component of a mining due diligence (DD) is the Technical Due Diligence (TD), which forms the core of the project. The value of a mining site is directly related to the quantity and quality of its underground reserves; therefore, the reliability of geological models, drilling data, and mineral resource/reserve estimates must be carefully examined. The investor must understand the accuracy and methodology of existing resource reports (typically prepared in accordance with international standards such as JORC or NI 43-101). Furthermore, the feasibility of the proposed mining plan, the suitability of the selected extraction and processing methods (metallurgy) for the ore type, recovery rates, and the realistic nature of the planned production rate are also key elements that the technical team must examine. Underestimating technical risks can lead to significantly higher costs during the operational phase or production significantly below the expected reserves, dramatically shortening the project's economic life. Therefore, technical DD is the first-line verification mechanism to confirm the feasibility of the investment.

Another dimension equally important as technical feasibility is Legal and Licensing Due Diligence. Mining is an activity reliant on licenses and permits, and the absence or expiration of these permits can lead to immediate project halt. Legal Due Diligence investigates the current status, duration, and compliance with the requirements of all exploration, operation, Environmental Impact Assessments (EIAs), and other necessary administrative permits held by the target company, as well as any disputes or objections. Additionally, land ownership, usage rights, third-party rights over the mining site (easement, lease, etc.), the validity of key supply and sales contracts, and critical obligations in labor contracts are also examined. Identifying legal risks often protects the buyer through specific warranty and indemnity clauses incorporated into the sales contract (SPA) and mandates that potential legal issues be resolved before the transfer, thus preventing the investor from facing surprise legal costs after the acquisition.

Another critical area that has gained increasing importance in the valuation of mining projects in recent years is Environmental, Social and Governance (ESG) Due Diligence. Modern investors and financiers consider not only the financial return but also the social acceptance and environmental sustainability of the project. ESG/ESG due diligence includes reviewing the project's environmental management systems, past environmental violations, waste management plans (especially for tailings and tailings dams), and cost estimates for site closure/rehabilitation obligations. The social dimension assesses local community relations, local employment policies, potential social conflicts, and the company's Social License to Operate (SLO). The governance dimension examines the company's internal control mechanisms, anti-bribery policies, and compliance with ethical standards. Neglecting ESG risks can lead to a mining project losing international financing, facing prolonged activist protests, and ultimately being forced to cease operations; this is considered one of the biggest risks today.

In summary, the due diligence process in the mining industry is not only a tool to support a transaction; it is also the most fundamental risk mitigation step toward realizing a mine's potential. By revealing the operational realities behind financial statements and the environmental and social obligations behind regulatory permits, it allows investors to negotiate their bid price sensibly and prepare for any potential post-transaction challenges. A comprehensive and independent due diligence process is an essential safeguard, preventing blind flights in mining investments and ensuring the most strategically and financially sound decision is made.